On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket No. L-1069-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued April 21, 2010 - Decided Before Judges Payne, Miniman, and Waugh.
This appeal involves the interpretation and enforcement of certain pricing provisions contained in a long-term contract for the processing of propylene into propylene oxide,*fn1 a process known as "tolling." Plaintiff BASF Corporation (BASF) brought suit against defendant Lyondell Chemical Corporation (Lyondell),*fn2 contending that Lyondell violated a provision of their contract by charging another Lyondell customer a lower fee for tolling without notifying BASF and lowering BASF's tolling fee to a comparable level.
Applying Pennsylvania law as required by the contract, the trial judge concluded that the contractual provision at issue was ambiguous. At trial, she admitted extrinsic evidence concerning the parties understanding of the ambiguous provision. Based upon its interpretation of the contract, the jury returned a verdict of $169.9 million in favor of BASF, to which the trial judge added $36.5 million in prejudgment interest.
Lyondell appeals the resulting judgment, arguing that the trial judge erred in allowing BASF's proposed interpretation to go to the jury because it was unreasonable and not supported by the law or evidence. Lyondell also challenges the methodology used for the calculation of damages, as well as several procedural and evidentiary rulings made by the trial judge.
Because we conclude that the contractual language at issue was not ambiguous as a matter of law and that the jury's consideration of one aspect of BASF's interpretation resulted in a flawed verdict, we reverse and remand for further proceedings consistent with our opinion.
We discern the following facts and procedural history from the record.
Lyondell's business includes the provision of propylene oxide to various customers, which it generally accomplished in one of two ways. Lyondell sometimes acquires propylene, tolls it into propylene oxide, and sells the finished product to its customer. As an alternative, Lyondell receives propylene provided by the customer and tolls it into propylene oxide, charging a fee for its services. The latter procedure was followed in the contract between Lyondell and BASF.
On July 1, 1996, Lyondell*fn3 and BASF entered into an agreement that required Lyondell to toll propylene supplied by BASF into propylene oxide. They subsequently amended and restated the agreement, effective January 1, 1999 (contract). That contract will continue until December 31, 2011, subject to two consecutive options to extend.
The key contractual provision at issue, which the parties refer to as the most-favored-nation (MFN) clause, provides as follows:
[I]f, during the term of this [contract], [Lyondell] sells or processes [propylene oxide] of similar quality to [propylene oxide] sold hereunder at a price, inclusive of all rebates, discounts or free goods, lower than that provided under this [contract], taking into account the [propylene oxide] Reservation Fee in determining comparable pricing, then [Lyondell] will notify BASF of such price and adjust the price set forth in Section 8(b)(ii) to meet such lower price, also taking into account the Reservation Fee set forth in Section 8(a) above, subject to the following exceptions: (A) [Lyondell]'s sales to its Affiliates' for their own use; (B) [Lyondell]'s sales for delivery outside of the NAFTA Region; (C) [Lyondell]'s sales to industries different than BASF's; and (D) [Lyondell]'s sales to co-producers.
The "reservation fee" referred to in the MFN clause was a payment required by § 8(a) of the contract. Although the reservation fee is stated to be $106.2 million in the contract, the parties stipulated that it was actually lower because part of the stated amount was applicable to a separate and unrelated contract between the parties. According to the contract, the reservation fee applies to a certain quantity of [propylene oxide] that will be delivered by [Lyondell] to BASF during each Calendar Year beginning in 1999 and ending in 2011. For 1999 the quantity is 125 million pounds and for the remaining years it is 135 million pounds.*fn4
The parties had differing explanations of the effect of the reservation fee on the amount of the tolling fees being charged to BASF, but Lyondell has not pursued that issue on appeal.
After the parties agreed on an initial tolling fee of 26.2 cents per pound of propylene oxide, BASF paid approximately $91 million to Lyondell to satisfy its reservation fee obligation. The tolling fee outlined in the contract was subject to modification on a yearly basis pursuant to the provisions of the contract.
In 2004, BASF conducted an audit of Lyondell's compliance with the MFN clause, during which it reviewed Lyondell sales from 2001 through the first quarter of 2004. Based on the audit, BASF claimed that Lyondell's sales of propylene oxide to Carpenter, another Lyondell customer in the same industry as BASF, were based on a tolling fee lower than BASF's for the applicable year, requiring a downward adjustment to BASF's tolling fee under the MFN clause. Although Lyondell maintains that there was actually no violation of the pricing requirements of the MFN clause, it chose not to contest that issue at trial and, in fact, conceded at trial that BASF was entitled to a refund of $22.5 million.
Unlike BASF, Carpenter did not supply its own propylene to Lyondell. As a consequence, the cost of the propylene had to be backed out of the price paid by Carpenter for the purchase of propylene oxide in order to determine the amount of the tolling component of the transaction between Lyondell and Carpenter. At trial, the parties presented different methods for accomplishing that procedure. Lyondell contends on appeal that BASF's approach, which was apparently adopted by the jury, improperly inflated the amount of the damages.*fn5
On April 12, 2005, BASF filed a two-count complaint alleging that Lyondell breached their contract and the implied covenant of good faith and fair dealing.*fn6 BASF's complaint asserted that Lyondell overcharged it in excess of $102 million, with additional amounts potentially due for periods that had not yet been audited at the time the complaint was filed.
The parties brought several pretrial motions and cross-motions for partial summary judgment and other relief. In May 2007, the trial judge denied: (1) Lyondell's motion that price comparisons under the MFN clause should be based on the annual weighted-average price Lyondell offered other customers, rather than on individual or "spot" transactions; (2) Lyondell's motion that its acquisition cost for propylene should be used for comparing propylene oxide tolling fees under the MFN clause; (3) Lyondell's motion to dismiss BASF's claims based on the reservation fee; and (4) BASF's motion that the parties had a meeting of the minds that price comparisons should be based on individual spot prices absent exclusions. Prior to trial, the trial judge also denied Lyondell's motion to prohibit BASF from questioning Lyondell witnesses about whether their actions in administrating the BASF contract violated the Sarbanes-Oxley Act*fn7 or Lyondell's internal ethics policy. Each of those issues will be discussed at greater length below to the extent necessary for the resolution of this appeal.
The jury trial commenced on June 26, 2007, and ended on August 13, 2007. The trial judge made several rulings during trial that are also challenged on appeal. They include objections to the testimony of expert witnesses and the denial of Lyondell's motion for an involuntary dismissal.
On August 13, 2007, the jury unanimously found that Lyondell had breached the MFN clause of the parties' contract and awarded BASF $169,932,670.17 in damages. Judgment in that amount was entered on August 23, 2007. The judgment was amended on October 3, 2007, to include $36,475,248 in prejudgment interest.
This appeal followed.*fn8
Although the contract provides for the application of the substantive law of Pennsylvania, we apply New Jersey law with respect to procedural and evidentiary issues. N. Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 569 (1999) ("[T]he procedural law of the forum state applies even when a different state's substantive law must govern."). Before turning to the specific issues raised by Lyondell, we outline our standard of review and the general principles of substantive law governing this appeal.
Lyondell does not seek to overturn the decisions reached by the jury as being against the weight of the evidence, which argument would be governed by Rule 2:10-1 (requiring that a motion for a new trial have been made in the trial court) and Rule 4:49-1(a) ("The trial judge shall grant the motion if, having given due regard to the opportunity of the jury to pass upon the credibility of the witnesses, it clearly and convincingly appears that there was a miscarriage of justice under the law."). Instead, it argues that the trial judge made erroneous rulings with respect to both pre-trial and trial issues that resulted in the jury being allowed to decide issues that were not properly before it. Lyondell also challenges the judge's decisions admitting or excluding certain evidence.
It is well established that our review of a trial judge's conclusions of law is de novo. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995) ("A trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference."). Consequently, we review a grant of summary judgment de novo, applying the same standard governing the trial court under Rule 4:46-2(c). Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007); Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995). A similar standard governs our review of a motion for an involuntary dismissal. R. 4:37-2(b) ("such motion shall be denied if the evidence, together with the legitimate inferences therefrom, could sustain a judgment in plaintiff's favor"). See Dolson v. Anastasia, 55 N.J. 2, 5 (1969).
With respect to evidentiary issues, "'[t]raditional rules of appellate review require substantial deference to a trial court's evidentiary rulings.'" Benevenga v. Digregorio, 325 N.J. Super. 27, 32 (App. Div. 1999) (quoting State v. Morton, 155 N.J. 383, 453 (1998)), certif. denied, 163 N.J. 79 (2000). "[I]n making relevance and admissibility determinations[,]" the trial judge's exercise of his or her "broad discretion" will not be disturbed, "absent a manifest denial of justice." Lancos v. Silverman, 400 N.J. Super. 258, 275 (App. Div.), certif. denied sub nom., Lydon v. Silverman, 196 N.J. 466 (2008). Nevertheless, we accord no such deference to a ruling that is "inconsistent with applicable law." Pressler & Verniero, Current N.J. Court Rules, comment 4.6 on R. 2:10-2 (2011).
With respect to substantive law, this appeal focuses on issues related to the appropriate interpretation of the propylene oxide contract, and specifically the MFN clause. The appeal further focuses on whether, and to what extent, there are ambiguities in the MFN clause or elsewhere in the contract that would require the jury, as finder of fact, to decide issues of contractual interpretation. See Trizechahn Gateway LLC v. Titus, 976 A.2d 474, 483 (Pa. 2009); Kripp v. Kripp, 849 A.2d 1159, 1163 (Pa. 2004).
In Murphy v. Duquesne University of the Holy Ghost, 777 A.2d 418, 429-30 (Pa. 2001), the Pennsylvania Supreme Court outlined the basic rules for contractual interpretation under Pennsylvania law:
The fundamental rule in interpreting the meaning of a contract is to ascertain and give effect to the intent of the contracting parties. Felte v. White, 451 Pa. 137, 302 A.2d 347, 351 (Pa. 1973). The intent of the parties to a written agreement is to be regarded as being embodied in the writing itself. Steuart v. McChesney, 498 Pa. 45, 444 A.2d 659, 661 (Pa. 1982). The whole instrument must be taken together in arriving at contractual intent. Felte, 302 A.2d at 351. Courts do not assume that a contract's language was chosen carelessly, nor do they assume that the parties were ignorant of the meaning of the language they employed. Steuart, 444 A.2d at 662. "'When a writing is clear and unequivocal, ...